Micro Economics

1 State and explain the difference between the law of demand and the law of supply. What does the phrase ‘other things equal” mean? Why do we need that? (10)

Answer:

The law of demand: as the price of a product increases, quantity demanded falls; likewise, as the price of a product decreases, quantity demanded increases.

The law of supply: an increase in price results in an increase in quantity supplied. When the price of a good rises, the supplier increases the supply in order to earn a profit because of higher prices.

The differences between the law of demand and the law of supply are:

The demand curve is downward sloping and has a negative slope; it is an inverse relationship between price and quantity demanded

The supply curve is upward sloping and has a positive slope; it is a direct relationship between price and quantity demanded.

“Other things equal” in Economics means that there is the assumption that when you are trying to predict the outcome of cause and effect that you have no variables and that the given facts in the problem remain the same.

This is important because we can only proceed to predict the outcome of 2 events interacting with each other when there are no other variables.

2 In your own words, explain the difference between a movement along the demand curve and a shift in demand. Then, provide an example from your own personal life where you have experienced each one. (10)

Answer:

The basic difference between a movement along the demand curve and a shift in demand is that the former is caused by a change in price while the latter is not. A movement along the curve results in a different quantity demanded at a different price. A shift in demand means that a different quantity will be demanded at a given price than was demanded before the change in demand occurred.

Take IPhone 5s for example, the price for the 16 GB was $649 but because of the iPhone 6 release, the iphone 5s price drops to $549. All other things...